Luxury sector set to pay heavy Covid-19 price in 2020 with up to €100 billion sales shortfall
Apr 8, 2020
Countries across the world are introducing extensive measures to boost their economies, but the luxury goods sector could still pay one of the heaviest prices in its history. According to the findings of a survey by Boston Consulting Group (BCG) and Bernstein, the Covid-19 pandemic could wipe out up to nearly a third of the luxury sector’s market value, estimated at €350 billion in 2019.
A genuine disaster that, in the worst-case scenario, could translate into a sales shortfall of €105 billion for the industry globally. Profitability is expected to plunge, EBITDA plummeting by over 40%.
After Covid-19 evolved into a pandemic, BCG revised the estimates it published in February, downgrading them significantly. BCG’s latest survey, carried out with the CEOs and CFOs of leading luxury labels, found that sector sales could potentially fall by 30%, rather than by 10% as initially forecast.
According to the respondents, this year’s EBITDA shortfall could end up being in the region of €30 billion. However, further exclusive analysis by BCG revealed a potential hole of up to €56-58 billion, with the possibility of a calamitous cash-flow loss estimated at €70-72 billion.
The year appears compromised for the sector, which will also have to deal with an unsold inventory headache, up to an estimated 105 million units, as opposed to the 10-15 million units forecast in February.
The only positives come from e-tail, the luxury industry's new competitive arena, now that the coronavirus has forced a sizeable slice of the world’s population at home, increasing the importance of online shopping. Labels that will have introduced new e-tail strategies will be able to benefit from this paradigm change, gaining a considerable competitive advantage.
BCG found that many labels have already deployed a host of defensive measures to limit the emergency’s impact, from remote working to cost cuts. But the consulting firm signalled that proactive measures are necessary too.
Commercially, luxury labels will need to protect their top line as much as possible, by shifting goods to less affected markets and pushing e-sales. They also need to boost their cash management capabilities in order to stem liquidity losses, for example by setting up intra-company liquidity departments tasked with deploying and monitoring initiatives to mitigate cash shortfalls.
Looking to the future, the majority of luxury labels’ CEOs and CFOs are optimistic, and expect to achieve pre-crisis revenue levels within a year from the pandemic’s outbreak. According to 40% of respondents, it will take a year, until 2021, while 30% of them think it will take until 2022.
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